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Economists raise recession concerns as RBA prepares for rate hikes

Leading economic forecasters in Australia are increasingly concerned about the possibility of the country’s economy slipping into a recession, with the likelihood now seen as a 50-50 proposition. As the Reserve Bank of Australia (RBA) gears up to potentially raise interest rates next week, both Shane Oliver, Chief Economist at AMP, and the economics team at National Australia Bank (NAB) have highlighted the heightened risks of a slump.

Shane Oliver of AMP stated in his weekend note that “The risk of recession in Australia is now very high… As a result, we see the risk of recession as now very high at around 50%.”

NAB economists echoed this sentiment, stating that “With rates moving higher, the risks to growth continue to rise with a recession now a 50/50 bet.” They noted signs of a sharp slowdown in economic activity following a strong growth period in 2022, coupled with a tight labour market and elevated inflation.

This week, attention will be focused on Australian inflation. The May measure of consumer prices will be released on Wednesday, with economists forecasting a headline rate of 6.0%, expected to drop well under 6% when excluding the impact of the fuel excise cut. If the reading fails to meet expectations, the likelihood of a rate hike next month will increase, along with the possibility of a half-percent increase becoming a focal point.

However, an increasing number of economists argue that the economy is weakening, and further rate hikes could lead to a sharp downturn. According to Oliver, consumer spending is likely to decline later this year and into next year as the cash rate exceeds 4%, causing debt servicing costs to reach record levels as a share of household income. He also highlighted evidence of slowing demand, falling retail sales, declining building approvals, and a slowing job market.

While Oliver believes the RBA has already taken sufficient measures to slow the economy and curb inflation, he acknowledged the central bank’s tightening bias, high inflation, and the potential for wage growth to exceed levels consistent with the inflation target. As a result, Oliver anticipates another 0.25% rate hike either in July or August, followed by another increase in September, bringing the cash rate to 4.6%.

NAB economists also expect the cash rate to reach 4.6% in the coming months as the RBA seeks to balance inflation risks. They slightly revised down their GDP growth forecasts, projecting growth of 0.5% year-on-year for 2023 and 0.9% year-on-year for 2024. The economists anticipate a rise in unemployment in the second half of the year as the economy slows more significantly, with the unemployment rate forecasted to reach 5% by the end of 2024.

Meanwhile, last week’s notable rate hike came from Turkey, where the central bank raised its key rate by 650 basis points to 15%. However, the move fell short of market expectations for an even steeper hike, disappointing many observers.